26 minute read
Market review
Eye on conveyancing
Craig Calder
director of mortgages, Barclays
As an industry we’re accustomed to absorbing challenging conditions, adapting accordingly and staying focused on ensuring business continues without disruption. Swings are always evident following a period of unprecedented circumstances. For lenders, this demonstrates how robust we have to be in our ability to service any peaks or lulls as best we possibly can, and this is also the case for a range of service providers across the housing and mortgage market.
CONVEYANCING
One of the hardest-hit areas of the mortgage journey during the extreme transactional highs experienced over much of 2020, 2021, and even 2022 was the conveyancing sector, a fact that was recently highlighted in data from Search Acumen. This found that with COVID-19 pandemic restrictions lifted and the industry scrambling to process a backlog of transactions, high registration volumes during Q1 2022 contributed to a total of 1.26m completed transactions that were processed by the Land Registry during the 2021–22 financial year.
This annual total was reported to be up 87 per cent on the previous financial year, when just 675,377 transactions were recorded. It also represented a 34 per cent increase compared with the 2019–20 financial year, before the pandemic first took hold. The analysis also showed that the rush of activity brought more firms back into the conveyancing market. An average of 4,058 firms were reported to be active each quarter during 2021–22, up from 3,483 during 2020–21. However, growing case volumes still left the average firm handing 60 per cent more transactions than a year earlier, and 32 per cent more than in 2019–20, to register their busiest financial year since records began.
These are some eyewatering statistics that help demonstrate the pressure that was placed on the conveyancing sector during this period. Firms of all sizes have had the challenge of managing recordbreaking activity levels, and the most digitally enabled firms have emerged as the ones that remain best placed to manage client needs effectively and keep workplace pressures in check.
HOMEMOVERS AND FTBS
The aforementioned case backlog ensured that activity levels remained relatively high in the conveyancing sector throughout Q1 2022, but this was also tempered by an expected lull in new-purchase business following the closing of the stamp duty holiday and some standard seasonal influences. This was evident in figures released by UK Finance, which showed that the number of people moving house dropped 42 per cent compared to the first quarter of 2021, with the number of first-time buyers (FTB) down by 12 per cent.
Although there was a decrease in homemovers and first-time buyers compared to the unprecedented highs of last year, numbers remained slightly above 2019 pre-pandemic levels as COVID’s ongoing effect continues to drive demand for more space.
The research also included fresh analysis around the potential impact of the cost-of-living challenge facing households in 2022. It found that the average mortgaged household will see a three per cent reduction in the amount of disposable income left over after mortgage, credit commitments, and living costs are met. However, the cost-of-living squeeze is suggested to be felt most acutely in lower-income brackets, which have around half the spare income of those in higher brackets, even before costof-living pressures are factored in.
The trade body added that whilst it expects mortgage activity to be strong through this year, this will largely be driven by customers coming to the end of their fixed-rate deals and looking to switch to a better rate. This contrasts with previous years, when a significant element of remortgaging activity involved borrowing substantial sums of additional money, in many cases to fund further property purchases.
MORTGAGE BORROWING
Moving into Q2, the latest money and credit statistics from the Bank of England showed that net residential mortgage borrowing decreased to £4.1bn in April, down 36 per cent from £6.4bn in March. Mortgage approvals for house purchases also decreased to 66,000 in April from 69,500 in March, with both measures slightly below their 12-month pre-pandemic averages up to February 2020. Approvals for remortgaging with a different lender decreased to 47,800 in April. In contrast, gross lending rose slightly to £26.5bn in April from £26.2bn in March, while gross repayments increased to £21.5bn in April from £20.0bn in March.
It’s clear that additional pressures are currently being placed on an array of household finances, and this will affect purchase activity for FTBs and second steppers. However, we are operating in a marketplace that is still low on stock, meaning property prices are likely to remain robust across the UK and a competitive lending environment will continue to generate some attractive mortgage rates for those borrowers who are in a strong enough financial position to take advantage of them. M I
Beware the siren call of easier borrowing
Shaun Almond
MD, HL Partnership
The recent proposals announced by the prime minister to help lowerincome families have easier access to mortgages, along with a new version of the right-tobuy scheme, should, in my opinion, be read in tandem with the Bank of England’s recent announcement that it is scrapping stress-tested mortgage affordability tests from 1 August 2022.
One of the overriding industry drivers over the last twelve or so years has been never to repeat the ruinous lending which was, in part, responsible for the 2008 credit crunch. Layers of formal regulation have ensured that lenders abide by new rules and procedures governing mortgage lending, and intermediaries accepted a protocol of putting customer welfare at the heart of their businesses. The latest step is just around the corner, with the impending arrival of Consumer Duty, which will put even greater focus on the way the industry treats consumers.
While many both inside and outside of the industry can argue that regulation has stifled lending and increased costs, there can be no doubt that lenders and mortgage advisers have, in the main, successfully adapted and innovated in a way that has shown client welfare and sensible lending are not mutually exclusive. Of course, pressure has grown on lenders and regulators to recognise some of the inconsistencies around affordability, such as those clients who have spotless rental payment records and yet are turned down for mortgages even though payments would be cheaper than the rent they have been paying.
However, the direction of travel has been well established, and any return to the excess of Wild West Noughties lending seemed to have been firmly consigned to the history books – which makes the PM’s announcement, when taken with the Bank of England’s musings on relaxing affordability rules, all the more bizarre.
One of the measures of affordability still rests round stress-testing against hypothetical interest-rate rises. BBR rises had not happened for years until almost the moment when the BoE started to ponder scrapping or relaxing those conditions in March. Interesting timing.
There is an argument that, as most mortgages are now on a fixed-rate basis, payment shock should be minimal. But what happens to the growing numbers of those who, every year, will come to the end of their low fixed rates and find that any alternatives being offered at the time bear little comparison to what they have been used to? Homebuyers have been extremely fortunate that from February 2009 until May 2022, the BoE base rate remained at 1.00 per cent or lower. But can we withstand a long period of high rates like those we experienced in the late eighties and early nineties, when BBR was regularly north of 10 per cent, reaching a high of 13.88 per cent in September 1989?
The plan for a ‘Right to Buy Part 2’ might also not be as comprehensive as the headlines suggested. When speaking to MPs on the Levelling Up, Housing and Communities Committee about the proposed new RTB scheme, Michael Gove was unable to say how it was to be funded, and revealed there would be limits.
The review of the mortgage market to help those in receipt of housing benefit to have it classed as income and make accessibility to higher LTV mortgages easier might be watered down in its final form. The dangers of making it easier to borrow at a time of fiscal turbulence should be becoming apparent to anyone thinking farther ahead than any temporary funding jump.
However, if it does go ahead, the question that has to be asked is that if the government succeeds in making it technically easier to borrow, how will that sit with lenders’ internal underwriting and credit policies? And more worryingly for advisers, perhaps, if this relaxed lending does come into force, how will it be interpreted under the wider regulatory responsibility placed on them under Consumer Duty?
Just because a mortgage can be done doesn’t mean it should be. M I
Help beat increasing living costs
Emily Smith
head of intermediary sales & distribution, Harpenden Building Society
The increasing cost of living is changing the lending environment and how home ownership is financed. Current harsh economic conditions are putting a strain on the population’s finances, affecting the mortgage products customers are considering, but also providing new opportunities to borrow.
THE RISE OF MULTIGENERATIONAL LIVING
Over recent months at Harpenden we have noticed an increase in the number of mortgage enquiries for multigenerational or intergenerational house purchases – families looking to buy a property together and being able to share the benefits of this arrangement.
This may be driven by cost-ofliving factors, longer-term financial planning, or a desire to be closer to parents as they get older and to avoid the cost of outsourced care. Further prompts for this type of multigenerational living include children returning from university and unable to afford rising rental costs; young adults opting to live with parents, as their individual income won’t qualify them for a mortgage; and blended families beginning a new life together. The full list of variations is endless.
What is apparent is that families are increasingly pooling their resources to create the best living space possible and to save money. It was a scenario that many families sampled during lockdown – they saw the benefits and are now looking to find and finance a property large enough to accommodate their needs. Others who were separated from family during the pandemic have also been keen to reunite – and what better way than living together in a multigenerational property?
Many consider it to be a winwin situation for all involved, with the potential to save significant money as the cost-of-living crisis gains momentum. Just think – one mortgage payment, one set of utility bills, one council tax payment, one insurance policy, shared meal costs and transport … the list just goes on.
Multiple generations living together as one unit, as was common throughout history, has once again become popular. So what should would-be homeowners consider as they look to fund accommodation for wider family?
FINANCING A MULTIGENERATIONAL PROPERTY
In scenarios like this, the property being purchased is likely to comprise either an annexe attached to the main house or a separate dwelling. We are happy to consider either instance for mortgage security purposes. Specialist lenders like us, who provide individual underwriting for every mortgage application, are more readily willing to accept this type of property than other, more mainstream lenders, which often shy away from properties where more than one dwelling appears on the same legal title.
This type of multigenerational purchase may also require, for example, up to four parties to be named on the mortgage and property title, with all four incomes being used to assess the affordability of borrowing required.
When this includes older parents, the aspect of their ages and lending into retirement is often queried. Again, this does not present a problem for a specialist lender like us, provided that we are satisfied that the term is appropriate for the individuals involved. Many other lenders are less flexible regarding the maximum age to which they will lend. At Harpenden there is no upper age limit, provided there is ongoing income to support the borrowing.
More generally for applicants, we consider salary, dividend and net/ retained profit for limited company self-employed; include up to 100 per cent of other income, including commission and bonus; and accept unearned income such as pension, rental, investment, and maintenance. This deeper dive into customers’ financial circumstances provides them with more flexible options when considering a mortgage for a complex multigenerational property purchase.
Harpenden has the expertise and experience in managing complex cases – delivering specialist solutions for brokers – to which other lenders and algorithms may not be able to adapt. Every policy is underwritten manually by an expert, which enables us to create highly flexible solutions regarding complex mortgages.
As the threat of increased living costs continues to make the headlines, multigenerational living makes good financial sense, and I believe we will continue to see increasing demand in this category, giving new opportunities to customers, brokers, and lenders alike. Specialist lenders, expert and experienced in providing mortgage options for multigenerational households, will be pleased to support brokers and their customers exploring this increasingly popular way of living. M I
Long live First Homes
Stuart Miller
chief customer officer, Newcastle Building Society
It was clear from subsequent media coverage that the news that the Help to Buy Equity Loan Scheme would close to new applications two months early was not communicated entirely to plan.
Homes England alerted developers to the close on a call in early May, with strict instructions not to make the government’s decision public until further details could be confirmed in September. However, it appears that two participants in the call opted to leak details to the Financial Times.
The government has since confirmed that the scheme will close to new applications at 6 pm on 31 October this year. At first glance, it might seem that the decision to end the scheme early is unwelcome news for those needing a helping hand to get on the property ladder. I, however, would argue that it is not.
Help to Buy is now almost a decade old, and has seen the government lend around £22 billion to homebuyers in the form of 20 per cent equity loans (40 per cent in London), with the buyer putting in a minimum five per cent deposit and a regular mortgage making up the rest.
It has taken serious flak during that time, with developers accused of cashing in on buyers’ boosted affordability and house prices artificially pumped up. Ironically, the scheme purporting to aid the accessibility of homeownership has in fact made it harder for those with lower incomes and less capacity to save to make that leap from renting to owning.
Enter First Homes. The scheme finally launched last summer. It’s designed to help first-time buyers and key workers in England purchase a newbuild property by discounting asking prices by a minimum of 30 per cent against the market value. Where house prices are especially high compared to wages, local authorities can require a larger minimum discount of 40 or 50 per cent to ensure the homes are affordable to local people.
The discount applies in perpetuity, meaning it will be passed on to the next buyer each time the home is sold by virtue of a restriction registered on the property’s title at HM Land Registry. The first sale must be at a price no higher than £250,000 – or £420,000 in London – after the discount is applied.
It works. We know this because we are already completing our first loans since joining the scheme in the middle of last year. Two of our borrowers, a couple in their twenties, found the home of their dreams in March 2021. Having met at university, they built up their savings by living together and moving between both of their parental homes. They finally moved into their own home in December 2021, and were one of Britain’s first couples to take advantage of the First Homes scheme from Newcastle Building Society.
Their home, a three-bedroom newbuild townhouse, is part of a Keepmoat development in Newton Aycliffe, one of the first developments to join the First Homes scheme. The couple reserved the property in June 2021 and their mortgage broker, Mark Pender of Mortgage Advice Bureau, turned to Newcastle Building Society.
A pragmatic approach to underwriting meant that we were able to see beyond the probationary service of one of the borrowers who, having previously been a chef, had retrained and was working as an accountant. As brokers regularly tell us, this can often be a barrier for lenders, who would normally want to see previous accountancy experience.
The net result of everyone working through this learning curve and going the extra mile, though, was that our borrowers managed to secure the home of their dreams. Indeed, when we asked them to sum up the experience, they both said the stress of buying their first home had been well worth it for the right property.
What this tale tells us is that First Homes may possibly be a better deal for certain types of first-time buyers. What is also clear, however, is that it is not a scale proposition now. The success we are seeing with the scheme needs a complex value chain of parties to be fully on-board and understand the scheme, its nuances, and the dependencies involved in getting it across the line. In our example, the local council, Homes England, the developer, our broker partner, and ourselves all had a significant part to play in making this happen and ultimately changing young people’s lives. If we can make this work at scale, my suspicion is that Help to Buy will quickly become a distant memory of the mortgage market. M I
Seatbelts on during economic turbulence
Steve Goodall
MD, e.surv
As this year opened, the question on everyone’s lips involved inflation and the cost of living – would higherthan-expected price rises lead to an allout crisis? The consensus then was that whatever happened would probably not be long-term – a bit painful for a bit, but not the end of the world, all other things being equal.
We’re heading into the second half of 2022 facing a very different picture from that painted six months ago. The Bank of England is trying to control the rate of inflation and the wage rises it’s triggering. But even as they raise the base rate bit by painful bit, most of the price inflation we’re suffering is international, and totally outside the reach of Britain’s central bank.
A paper published recently by the Office for National Statistics (ONS) could offer some respite for those whose role it is to consider economic risk from an academic and commercial perspective – if not for those actually struggling to pay bills.
The ONS paper notes that during the pandemic, household savings rates surged. The household saving ratio – the proportion of household resources that is not consumed – was six per cent in 2019’s final quarter. In 2020 Q2, it peaked at a record 23.9 per cent, and remained elevated during the pandemic period before falling close to the pre-coronavirus ratio at 6.8 per cent in Q 4 2021. Higher-income households typically have a lower propensity to spend from savings than lower-income households. Analysis of the NMG Household Survey by researchers from the Bank of England found that 42 per cent of high-income households reported an increase in savings compared with only 22 per cent of low-income households.
“Finally,” ONS economists note, “the accumulation of savings may also be used to reduce debts or purchase financial assets rather than fund an increase in household consumption. Data on consumer credit flows published by the Bank of England have recorded net credit paydowns. This is also consistent with the sharp rise in overdraft and consumer credit interest rates.”
Where does this leave us when assessing what happens next in the British economy – and, more specifically, how that affects mortgage lending appetite, credit risk appetite, and the performance of existing assets?
Capital Economics recently reviewed its house-price inflation forecast up, predicting nine per cent inflation yearon-year in Q4 of 2022. The research house has been pretty punchy in its outlooks before, but in fact, its analysts correctly forecast that house-price growth would be stronger than others anticipated this year.
Back in September, they were forecasting a five per cent uplift in house prices in 2022 when the consensus was 1.6 per cent. With the first half of this year already having seen house price inflation consistently in double digits, nine per cent doesn’t seem pie-in-the-sky. Good for asset values in the short term, with affordability supported by the aforementioned wage increases and cash savings.
But Capital Economics isn’t so sanguine about next year. With the base rate on a relentless ascent, markets are already pricing in more economic stress, and over the next six months that will feed into higher swap rates. That in turn will mean anyone remortgaging later in the year and into next year will likely see a very sharp rise in their monthly mortgage payments.
Capital Economics expects the average rate on new mortgages to rise from 1.8 per cent in Q1 to 3.3 per cent by the close of the year, climbing to a peak of 3.6 per cent in 2023. This would be the sharpest rise in mortgage rates since 1990 – and we all know what happened to the housing market then. (I know, it’s not the same.)
It’s also worth thinking about existing borrowers’ affordability. UK Finance figures show the number of customers in arrears remained low in Q1 this year, the fourth quarter the figure has fallen in a row. The number of homeowner mortgages in arrears is now 10 per cent lower than a year ago, and buy-to-let mortgage arrears are five per cent lower for the same period. Possessions are up a bit, but UK Finance points out this is largely because there has been a backlog coming through from after the government moratorium ended.
No-one can tell how bad or mild all of this will be – so much depends on the situation in Ukraine. But unlike the early 1990s, when the base rate was in the mid-teens, lenders are not encouraged or inclined to act harshly on defaults. Following the global financial crisis, forbearance is the order of the day, and with government just having folded on the energy windfall tax to give money to the country’s poorest, I doubt any lender will start evicting those same families.
House prices remain robust because of the structural imbalance of supply and demand that existed well before the pandemic. The cost of debt remains very low. Only one dynamic will change all this, and that is unemployment. But we currently still have almost full employment, and that will have to deteriorate significantly to warrant a rethink. As is usually the case, we’ll probably all simply get from one day to the next with some good and some bad along the way. We will manage. M I
Making moves with the market
Emma Walker
chief marketing officer, LifeSearch
As anyone in marketing can testify, online advertising costs have shot up and brands have had to spend more to compete for shrinking pools of customers.
Yes, the cost-of-living crisis has a digital division, too.
I recently met with our partner team at Google to discuss it. And while those wily supply-anddemand aficionados aren’t about to recalibrate their cost model any time soon, the team presented us with helpful data to show how a cost-ofliving crisis translates into online behaviour, and what advertisers can do to adapt.
It’s striking how much a crisis alters consumer habits – and Google the Omnipotent is the perfect forum in which to watch it play out.
HELP, SUPPORT, AND DISCOUNTS
Google data suggests that 48 per cent of the UK population is actively looking for deals and discounts in their searches. That’s much more than usual, and it’s pan-category – from clothing and kitchenware to protection.
Interestingly, the decline of consumer confidence correlates exactly with a rise in Google searches for financial guidance, help, and advice.
In protection, we’re seeing search terms such as “buy life insurance” drop off and “life insurance advice” pick up. Similarly, a budgetconscious search term such as “life insurance average cost” is up 600 per cent year-on-year, with “compare life insurance quotes” up 2,000 per cent.
It’s quite obvious, until you consider that the volume of protection searches is fairly consistent. There’s been no big drop-off; customers have simply changed the emphasis and angle of their searches.
While protection isn’t likely to see massive growth in the coming days, we can respond by giving nascent customers what they need. Options are important. Advice has more value than ever. Preparation is the name of the game.
PATIENCE, PREPARATION, PROTECTION
We don’t need Google to tell us that the UK housing market remains strangely bullish. The average UK house price has just hit a new high – as it has done every month this year – of £368,614, according to Rightmove.
During a crisis, skyrocketing property prices don’t bode well for the next generation of homeowners. And they know it. According to Health, Wealth & Happiness 2022, under-35s are most likely to have recently delayed a big-ticket purchase (like a house).
However, we also know under35s are budgeting with a vengeance, have embraced financial planning, and are more likely than ever before to consider income protection and critical illness cover.
Google concurs. Searches for the aforementioned products are on the rise, but again, it’s with qualifiers like ‘advice,’ ‘help,’ ‘comparison,’ and ‘options.’
These ingredients affirm to us in protection that younger folks are biding their time and vying to build some financial foundations. In that endeavour, they’re crying out for direction. And we need to be there.
We’re the experts. We need to engage. Yes, the market is in flux, but that doesn’t mean stepping back or sighing in despair. It means being present to understand tomorrow’s customers today; to support their needs now – even if the payoff comes later. M I
Gordon Reid
business and development manager, London Institute of Banking & Finance
If you can advise on specialist property finance, as well as on traditional regulated home loans, you’re in a better position to understand your customers’ needs and the options they have available. That means you’re more likely to give them the best possible advice and find them the best products.
A big part of that is being better placed to identify when customers need specialist property finance, and – when you see the need – being able to give them a fully comprehensive service without having to refer them to a colleague or another specialist adviser. You may even find that you’re the person colleagues refer customers to, if you can offer specialist advice. At the very least, having those skills is a good way to secure additional business and an extra income stream.
WHAT IS SPECIALIST PROPERTY FINANCE?
If you’re not confident about advising on specialist property finance, it could have a negative impact on your business and career and, more importantly, how you serve your customers.
The term specialist property finance generally covers commercial lending products, including bridging loans, development finance, commercial mortgages, and specialist buy-to-let mortgages. Many loans in this sector are unregulated, but that doesn’t diminish an adviser’s responsibilities to a customer.
Not being able to support your customers when they need one of these products could result in you losing out on some potentially lucrative business. Worse still, it could mean trying to shoehorn a customer into a mainstream mortgage deal when a specialist finance product would be more suitable.
Without understanding how specialist property finance works, you won’t know when to refer customers to a colleague who can get them the best deal.
From the customer’s perspective, talking to an adviser who doesn’t fully understand the specialist property finance market may mean paying more interest in the long run, or being tied to a deal that doesn’t really suit.
OFFERING SPECIALIST MORTGAGE ADVICE
The broader definition of a specialist mortgage is one that doesn’t meet the normal lending criteria set by traditional mortgage lenders. This can include a variety of application types, from regulated home loans for creditimpaired borrowers and self-certification mortgages, to borrowing against properties of non-standard construction.
Specialist mortgages are generally considered more complex than mainstream borrowing. However – particularly with mortgage criteria search tools – it’s become easier for brokers to identify lenders who’ll consider the more complex applications.
When it comes to specialist property finance, while it’s easier to identify lenders, you can’t rely on a search tool to identify which products might suit your borrower. You need a solid knowledge of products and providers, as well as an understanding of how to structure the right deal for the right project for your customer’s property.
The strength of the housing market means that demand for development finance is strong. This drives the need for bridging loans and specialist buy-tolet mortgages. Although many of the major high-street lenders are reluctant participants in this market, a significant number of specialist lenders have emerged in recent years.
Some advisors have seen the potential for business growth and career progression that it offers. Membership of the specialist finance trade bodies – the Financial Intermediary and Broker Association (FIBA) and the Association of Short Term Lenders (ASTL) – has increased significantly over the last few years, indicating a greater awareness of the opportunities available.
BRANCHING OUT
So how do you branch out or upskill to advise in specialist property finance?
A good starting point is to engage with the specialist finance trade bodies, who will: • help you develop your business; • identify your key development needs and access relevant support; • give you access to lender and professional services partners.
If, like most specialist property finance advisers, you’ve been working in the regulated mortgage sector, you’ll already hold CeMAP or a similar qualification. You could build on that by taking Advanced Mortgage Advice to get a CeMAP diploma, which will help you deal with atypical cases. CeMAP (or the more advanced diploma) isn’t a requirement for advisers who work exclusively in specialist property finance, although providers of credit are all required to be authorised by the Financial Conduct Authority (FCA) and to comply with rules, including the Consumer Credit Act.
Whatever you decide – and whichever direction you choose to take your business and your career – we can all agree that one of the most important elements of being a mortgage adviser is to educate your customers.
That includes making them aware of all their options. So even if you choose not to advise on specialist property finance, it’s worth learning how it might benefit them. M I
